Small Cap Value and Emerging Markets Roar Back with a Vengeance

Last year, while the S&P 500 was largely flat, small cap value and emerging markets were down significantly. No wonder some clients of mine got a bit edgy.

What a change one month has made! As of Feb. 5, these two asset classes have roared back with a vengeance. See the table below.

2012 Year to Feb 5th

2011

DFA US Small Cap Value

12.74%

-9.74%

DFA Emerging Mkts Value

19.44%

-26.50%

DFA Intl Small Cap Value

12.74%

-19.41%

The lesson here: when we see big losses like -19%, -26%, we can view them as a financial Armageddon or as a buying opportunity. The latter position is mentally much harder to take, but it almost always pays off.

You didn’t explicitly mention the term, but I thought that’s what you meant. (You have to be very clear, type s-l-o-w-l-y, and use small words for some of us non-financial types. *grin*)
Yeah, re-balancing hurt. It was hard to explain to my wife why I wanted to move her money from “safe” cash and bonds into stocks when stocks were doing so poorly. She’s much happier now. I’m not quite at the point of selling high to re-balance again, but I think that conversation will be much easier.

I recommend a buy Jason Zweig’s book “Our money, our brains” for your wife. The book explains very well why we are stricken by fear unnecessarily when markets fall.

It turns out there is a small part of our brain called amygdala that constantly scans for danger. It works under our consciousness. When it senses danger, it seizes the whole brain function, sucking energy away from other parts of the brain. It sends the body into two responses: fight or flight.

Amygdala was very useful in prehistorical time when our ancestors faced predatory animals all the time. But it really could hurt our financial well-being if we let it hijack our brains without check.

Part of the reason to have a well-written plan and always refer to the plan is to prevent amygdala hijack.